The ageing of the car population.

While auto makers are flirting with bankruptcy, parts dealers do well. By Bertel Schmitt, CEO Sinamotive Group (HK) Limited.

You think the stock market is bad? Look at the auto market. Empty showrooms. Incentives that don’t incite interest. This is the worst year for auto sales in decades, especially in the U.S. and Europe. In September 2008, US new car sales crashed to a record low. For the first time in more than 15 years, monthly U.S. sales came in below 1 million. Industry sales tanked by 27% to 964,873 vehicles. Likewise, the European new car market is on track to fall to its lowest level in more than a decade.

In Europe, the drop of new car sales is expected to be less dramatic than in the U.S. Analysts expect Western European volumes to decline 5% in 2008 and 3.5% in 2009. Analysts also expect Western Europe and the US to report approximately 14 million in new cars sold in 2008, with the outlook flat to lower in 2009. Some industry insiders, such as Katsuaki Watanabe, President of the world’s largest automaker, Toyota, expect even lower numbers. Watanabe recently said that U.S. new car sales will probably end the year below 14 million.

J.D. Power & Associates warned that U.S. industry sales could “collapse” in 2009. Standard & Poor’s put GM and Ford on bankruptcy watch “because of the rapidly weakening state of most global auto markets,” and weak capital market conditions. Ford and GM promptly denied that they might consider filing for bankruptcy. GM is talking with Chrysler about a merger , after merger discussions with Ford went nowhere.

How can you make a profit with cars in such a dismal environment? Don’t sell cars. Sell car parts. People may stop buying new cars. However, people can’t stop driving. People simply hold on much longer to their older cars. Cars are having an increasingly longer usable life. Already, the average age of all cars on Germany’s streets is 8.4 years. 10% of Germany’s cars are over 16 years old. According to a recent study, the car park in Europe will rise from currently approximately 200 million to 275 million in 2025. The study also predicts that the average age of a car on Europe’s streets will rise to 10.2 years in 2025. In the new European countries, the average age of the car is expected to rise to 14 years by 2025.

If you are in the business of servicing older cars, you are looking at a bonanza. Nobody spends more for service and repair than owners of older cars. According to a recent DAT-Veedol Report, the annual average spendings for maintenance and repairs by German owners of cars that are less than two years old are EUR 109. Owners of cars older than 6 years spend close to EUR 500 per year for maintenance and repairs. The Wall Street Journal concurs: “As more consumers hold off on buying new cars, they’re making more repairs.” In Germany,58% of the cars older than 8 years are no longer serviced at new car dealerships, a study says. New car dealerships are rapidly losing their profitable after sales business. As older cars are subject to more wear and tear, expenditures for service and repair are much higher than for new cars (where the big bills are covered by warranty anyway.)

Owners of older cars may spend more, but they don’t throw their money away. Owners of older cars are value conscious. The price of the repair bill should be commensurate with the value of the car. The key to this profitable market are high quality, competitively priced parts.

Where to source these high quality, competitively priced parts? Mainly from China. China is the world’s biggest exporter of auto parts. Auto manufacturers worldwide have been buying their parts in China for years. Japanese, European, and US automakers source parts used for production in their home markets in China. According to the report, GM buys 20 million parts a month from 190 Chinese suppliers, and had experienced no quality problems over the past year. What’s more, most brand-name parts are already manufactured in China.

Now more than ever, sourcing car parts in China makes dollars and cents:

- Metal prices had a mad run-up in the first half of 2008. Since July, they have been coming down. In October 2008, Aluminum fell to a 31-month low due to the anemic health of the car industry.

- Steel prices are also coming down hard. There are reports of panic selling as speculative positions are being liquidated. Forbes quoted an analyst who said that steel prices are “coming down hard and fast” as the economies of the United States and Europe deteriorate and growth slows in China.

- Rates for container shipping are falling precipitously. “Barely 12 months ago carriers were making record profits in the Asia-Europe trade. But from summer 2008, freight rates have plummeted ,” said Neil Dekker, editor of the Annual Container Market Review and Forecast 2008/2009 for London-based Drewry Shipping Consultants.

- China’s domestic auto sales will most likely see 2008 growth rates of under 10%, just released figures by the China Association of Automobile Manufacturers say, In the previous years, China had experienced double digit growth rates. The reduced domestic demand for OEM parts is expected to apply additional pricing pressure on parts manufacturers.

In front of this backdrop, many repair chains and wholesalers in Europe and the U.S. are preparing their own private label parts lines, sourced in China. There is a potential for huge profits. Many parts can be sourced in China for a fraction of their European and U.S. retail prices.

People might delay the purchase of a new car for a while, but they won’t stop driving. As their cars get older and see more wear, they need more parts.

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